Related

Israeli Prime Minster Benjamin Netanyahu had hoped that his apology for the poor timing of plans to expand Israeli settlements in East Jerusalem would have been enough to quell the resulting furor. Instead, the Obama Administration has opted to escalate the standoff into a major battle of political wills between Netanyahu and the White House  one in which neither side can easily back down despite the risks involved in hanging tough.

David Axelrod, President Obama's chief political adviser, on Sunday branded as an "affront" and "insulting" Israel's announcement, during Vice President Joe Biden's visit to announce a renewed peace effort, of plans to build 1,600 new housing units in the part of the Holy City conquered in 1967 and claimed by the Palestinians as their future capital. Israeli Ambassador Michael Oren reportedly told diplomatic colleagues over the weekend that U.S.-Israel relations faced their worst crisis in 35 years. (See pictures of 60 years of Israel.)

The fact that the Administration chose to keep the issue alive after Biden's departure demonstrates that it sees the issue as an opportunity. Having been rebuffed in its efforts to get the Israeli government to demonstrate good faith in peace negotiations with the Palestinians by freezing settlement activity on the territories conquered in the war of 1967  a failure that has underscored Arab skepticism over talking peace with Netanyahu  the White House appears determined to use the Israeli gaffe as leverage to extract a major concession to spur the peace process.

Secretary of State Hillary Clinton, after publicly announcing the substance of a 42-min. dressing down of Netanyahu by phone, reportedly sent the Prime Minister a list of steps Washington expected him to take in order to repair relations. Those steps are said to include investigating the Jerusalem settlement announcement; reversing the construction approval; making substantial gestures toward the Palestinians such as releasing a large number of Palestinian prisoners, withdrawing troops from additional areas in the West Bank or easing the siege of Gaza; and publicly declaring Israel's intent to negotiate with the Palestinians on all of the conflict's core issues  borders, refugees, settlements, security, water rights and the status of Jerusalem. (Netanyahu's government has often insisted that Israel's claim to all of Jerusalem is non-negotiable.)

Taking such steps, of course, would threaten Netanyahu's coalition with the right-wing parties that are committed to expanding settlements. For now, at least, Netanyahu is talking tough: "The building in Jerusalem  and in all other places  will continue in the same way as has been customary over the last 42 years," he told a meeting of fellow Likud Party members on Monday. (See pictures of Jerusalem, a divided city.)

But few in Israel expect the game of chicken to last very long. Israel can ill afford a public breach with its main ally, financial backer and arms supplier at a time when the Israeli leadership's prime objective is to focus U.S. attention on Iran. Nor would Netanyahu's government necessarily collapse if he gave some ground in response to U.S. pressure. His right-wing coalition partners know that they'll have a better chance of sabotaging the peace process while inside the government than if they were the opposition, forcing Netanyahu to turn instead to the centrist Kadima Party as a coalition partner.

But the Jerusalem standoff also carries a domestic political risk for the Obama Administration. A number of Republicans have already lashed out at the President over the issue  former Bush Administration Middle East policy chief Elliott Abrams wrote in the Washington Post that "the Obama Administration continues to drift away from traditional U.S. support for Israel. But time and elections will correct that problem; Israel has a higher approval rating these days than does President Obama." And the influential American Israel Public Affairs Committee, to which all major leaders of both parties traditionally declare their unstinting support for Israel, expressed "serious concern" over Administration statements on the issue and demanded that the White House "take immediate steps to defuse the tension with the Jewish State." This being an election year in the U.S., Obama may feel pressure from vulnerable congressional Democrats to avoid a protracted confrontation with Israel. (See pictures of Israel's assault on Gaza.)

But with the Biden visit having highlighted differences over Jerusalem, the issue can't be easily fudged. Even if Netanyahu quietly undertakes to refrain from new construction in East Jerusalem, the move would not go unnoticed for long  and would prompt right-wing demonstrations and agitation. The right-wing settler movement is well entrenched in the government bureaucracy responsible for settlement construction, and precedent suggests they would find a way to continue building regardless even of any secret promises to the U.S. by Netanyahu. "Everything in East Jerusalem is under a magnifying glass and involves too many people and politics," a senior government source told TIME. "A de facto construction freeze in this part of the world is doomed to fail."

The deeper problem is that Israel's position on Jerusalem is at odds with the U.S. goal of winning agreement on a two-state solution. While a broad array of Israelis are either totally against dividing Jerusalem or want to expand Israeli settlements ahead of any peace deal, no country in the world  including the U.S.  recognizes East Jerusalem as Israeli territory. (Even George W. Bush, America's most ardently pro-Israel President, refrained from moving the U.S. embassy from Tel Aviv to Jerusalem.) This disagreement between friends wasn't a big deal as long as there was an Israeli government committed to achieving peace based on the 1967 borders, or a U.S. Administration  like Bush's  that wasn't. But as long as the Obama Administration remains determined to press for a two-state solution to the region's longest-running conflict, Jerusalem will remain a source of friction between Israel and the U.S.